Making money in financial markets: If we look at the last one year returns of various global equity indices, MSCI Czech Republic Index has been on top with a return of 45 per cent. MSCI Turkey has given 34 per cent and MSCI Argentina has given 31 per cent return. Now let’s look at some important points…
Status of best performing countries
The Czech economy has grown at a CAGR of less than 5 per cent, inflation has averaged 3 per cent and interest rates have risen from almost zero in 2017 to 3.75 per cent now. The youth unemployment rate ranges from 5 per cent to 12 per cent.
Turkey’s economy has also grown at a CAGR of less than 5 per cent, inflation has been between 10 per cent (2016-17) and 36 per cent (current) and interest rates are at 16 per cent. The unemployment rate is more than 11%.
Argentina’s economy has barely grown in the last five years. The inflation rate has been between 15 and 60 per cent (currently 50 per cent). Interest rates have been between 25 per cent and 85 per cent (currently 40 per cent).
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In comparison, the MSCI India Index has been the fifth best performing index with a return of 29 per cent. India’s GDP growth has been more than 5 per cent, inflation is less than 6 per cent and interest rates are around 4 per cent.
At first glance, the performance of the stock market seems to be at variance with economic and social realities. Some may argue that the performance of the equity markets of Turkey and Argentina should be taken into account of the poor performance in the past and the ‘hope’ of recovery in the near future.
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Equity research makes no sense if “expectation” is the basis for recovery
My answer to them would be that MSCI TURKEY INDEX remains one of the top 10 outperforming index for the last 3 years. If the first criterion for investing in equities is ‘expectation’, regardless of the current gloomy conditions, then there is probably no point in equity research and analysis.
Investors should buy such assets which have fallen victim to disappointment in the recent past. This strategy has worked, for example, in the case of Greek, Italian, Portuguese and Spanish and debt in the case of the Global Financial Crisis.
This shows that the secret of earnings in the financial markets lies in “disappointment”, not in “expectation”.
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Perhaps this is what drives investors to buy shares of disappointing companies like DHFL, Jaypee Infratech, BILT, Syntex. However, investors are nervous about non-events like budget and state elections and react in anticipation of a “lottery” thus complicating the narrative of markets ready for a pre-budget rally.
Irrespective of this, I do not prefer to base my investments solely on expectations. I would like to see if there is a method for equity outperformance in this era of socioeconomic distress and whether asset prices reflect the ground realities.
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